Russo-Turkish Drama: a Christmas Gift for the Georgian Economy?

A “STAB IN THE BACK” AND ITS “GRAVE CONSEQUENCES”

On November 24th, a Turkish Air Force fighter jet shot down a Russian SU-24 that briefly strayed into its airspace. One pilot was killed, and another member of the Russian military perished in the rescue attempt. Vladimir Putin called the event a “stab in the back” even though he had turned his back on Turkish warnings about incursions into its airspace. Turkish President, Recep Tayyip Erdogan, facetiously stated that Turkey would not apologize for the event and that Russia should be the one apologizing. The press conferences that followed produced a lot of hot air, with both sides presenting starkly different accounts of what happened and promising each other grave economic and political consequences.

Rather than targeting Turkish air defenses, President Putin’s promise of “grave consequences” translated into a spate of measures boycotting Turkey’s all-inclusive hotel deals, agriculture and textiles. Published on November 28, Putin’s Ukaz #583 included the following measures:

• Selective restrictions on imports from Turkey;

• Selective restrictions on Turkish businesses to operate in Russia;

• Selective restrictions on the hiring of Turkish personnel/consultants by Russian companies (from January 1);

• Guidance for the Russian government to ban charter flights to/from Turkey, and develop a list of Turkish products and companies falling under the Russian embargo.

On November 30, the Russian government issued a decree officially establishing a ban on charter flights, reducing the number of licenses for road cargo transportation, and providing a list of agricultural products falling under the embargo, including:

• Fruits (citruses, such as oranges and tangerines; grapes, apples and pears, peaches and apricots, plums and strawberries).

Russia-imposed restrictions on business, trade and travel relations with Turkey are likely to inflict considerable damage on the Turkish economy. Russia is an important export destination for Turkey’s agriculture and textile industries (worth $6 bln or 3.8% of total Turkish exports in 2014). Even more significant are services: last year, Turkey exported a total of $9.7 bln of (mainly) tourism and construction services. In 2014, more than 4.4 mln Russian tourists (about 12% of total tourists) visited Turkey, spending about $6.6 billion, according to Russia’s Central Bank data.

In addition to any immediate pain both parties are able to inflict on each other, a lot more is at stake for Turkey and Russia, including major new pipeline and nuclear energy projects…

ONE MAN’S CONFLICT IS ANOTHER MAN’S MERCHANDISING OPPORTUNITY

International sanctions are a great boon for third-country providers and … shady intermediaries. Ironically, in 2014, Turkey has been itself a beneficiary of the counter-sanctions Russia imposed on the EU. Agricultural trade between the two countries surged to $4 bln as Turkish nuts, fruit and veggies occupied some of the extra space created by the withdrawal of European products, bringing Turkey’s share in Russia’s agricultural imports to 20%. Visiting Russia in September of this year, Erdogan shared an ambitious plan to bring bilateral trade to $100 billion. “We have set such an aim by 2023," he said at the opening of Moscow’s Cathedral Mosque.

With Turkey coming under Putin’s fire, many countries and companies are vying to occupy the extra space to be created by the Russian embargo on Turkish companies, goods and services. Situated right between the two conflicting parties, Georgia also stands to benefit from the region’s newest geopolitical spat.

The downing of the Russian SU-24 by Turkey came less than a month after the Russian Airbus A321 passenger jet crash over Egypt’s Sinai desert, leaving millions of Russian tourists up for grabs. “With Turkey and Egypt out, Israel looks to woo Russian tourists” runs a headline on Start-Up Israel website. Indeed, Israel was one of the first countries to promote Eilat, the country’s only Red Sea resort, as a viable alternative to Sinai and Antalya. To draw Russian tourists to Eilat, Israel is spending public funds to boost marketing efforts in Russia and offers a rebate of 45 euros per passenger to European carriers flying into the nearby Ovdah airport.

Georgia does not go out of its way to attract Russian tourists… because it does not have to. Almost half a million of Russian tourists visited Georgia in the first 8 months of 2015, a 12% increase compared to the same period of last year. According to the Georgian National Tourism Administration (GNTA), Russia already ranks fourth in the number of visitors (after Turkey, Azerbaijan and Armenia), accounting to 15% of all travelers to Georgia in 2014. What if Georgia tries a bit harder?

Current geopolitics create an especially lucrative opportunity for Georgia’s hospitality industry. Georgia’s beaches and hotels may not be comparable with those of Turkey and Egypt, but Georgia can offer many more entertainment options, including casinos, ski, mineral water and spa resorts. Geographic proximity and moderate prices give Georgian attractions an edge for budget tourists affected by the ruble’s devaluation. Most importantly, however, Georgia is a tremendously powerful brand everywhere in the former USSR where people are still nostalgic for Georgia’s fabled hospitality, its mountains, polyphonic singing, supras and wines.

With up to 7 million Russian tourists still wondering where to go, Georgia must act to bring them in and deliver top-class service and experience to secure repeat business. What would be required is a well-orchestrated campaign, including, for instance, a publicly financed marketing effort, rebates and subsidies for budget airlines, and additional investment in revitalizing all-season touristic spa destinations, such as Tskaltubo and Borjomi. In the longer run, it would be in Georgia’s interest to open up additional transport connections, including the once vital train and road routes running through Abkhazia.

DIRTY DANCING WITH TRADE SANCTIONS

Even a quick glance at Georgia’s 2014-15 trade data may discover some interesting anomalies. For instance, the exports and imports of trout in the first 9 months of 2015 have exceeded their 2014 values by exactly the same amount of about $450,000. All extra imports come from Norway and Denmark, which are subject to Russian sanctions. All extra exports go to, yes, you may have guessed, Russia.

Owing its existence to Russian anti-EU sanctions, re-packaging and re-exporting Norwegian or Danish trout to Russia must be a lucrative business. Repackaging and re-exporting Turkish fruit, veggies and textiles to Russia may be the next big thing in the Georgian economy. Incidentally, Turkish textile factories started mushrooming in western Georgia as Turkish producers scrambled for additional export quotas to the EU (which Georgia was not utilizing). It looks like from January 1, 2016, these factories will switch to 24/7 operation, with Russia – not the EU – as their main export destination.

At present, Georgia is unable to competitively supply its own needs even in the most basic greenhouse products, such as cucumbers and tomatoes, with the gap in fresh agricultural products being supplied by the much more efficient Turkish businesses. Unfortunately, given the need for massive investment and reorganization, Georgia’s farmers are unlikely to be able to fill in the void created by the Russian sanctions on Turkish fruits and veggies. Such investment will not make sense in the absence of long term market access assurances, which Russian sanctions cannot provide.

While shrewd traders are likely to take advantage of the Russian sanctions by repackaging and re-exporting banned Turkish products, Georgian farmers – particularly those investing in modern greenhouse technologies – are likely to come under additional pressure the moment Turkish competitors start dumping additional (and higher quality) agricultural produce on the Georgian market. Unless moderated through effective anti-dumping regulations, such pressure may cause the best Georgian producers to go out of business. A true nightmare scenario.